We were browsing the Private Rulings register recently and noticed two somewhat similar scenarios had been given two very different answers by the tax office. Both rulings related to the deductibility of interest on a block of land, with intent to rebuild an investment property for long-term income.
The two rulings can be found here, for those playing at home;
PBR 1012057998942 – Interest deduction was denied
PBR 1012056504933 – Interest deduction was approved
In both scenarios, the property was previously established as an investment and had previously provided assessable rental income. Then, the property was deemed inhabitable; in one case due to structural damage, and the other was caught in flooding.
In both cases, it was deemed preferable to demolish the property and rebuild, rather than attempt repair works. Both investors planned to offer the newly built properties for lease upon completion.
The key difference between the two cases appears to have been in the level of effort and expected timeframes towards completion. As we know from Steele’s case, interest is deductible if there is genuine intent and effort to produce income even if it takes many years to generate (if at all!). In the approved ruling, the investor moved quickly and signed a contract to begin construction within the same financial year as the flooding.
However, in the denied ruling, the investor wanted to wait until a new council plan was to be released (expected in approx four years after demolition) before building in order to construct a bigger and better dwelling for higher future income. The tax office deemed that this delay was unnecessary and thus the intent in holding the land was no longer connected to the pursuit of assessable income.
So while this distinction isn’t ground-breaking, it is a good reminder that if we’re looking to claim interest on vacant land then not only do you need to have very clear intentions, but we also need to be able to demonstrate attempted progress towards that goal as well.